No one has a crystal ball when it comes to the U.S. economy, but recent data suggests the possibilities of an economic recession are increasing. A careful, timely preparation plan makes good business sense.
First I want to remind you that economic statistics are not always reliable. In fact they can be very confusing. Let me give you a recent example.
On Friday June 3 the U.S. Bureau of Labor Statistics announced an addition of just 38,000 nonfarm payrolls during May 2016. Economists had been expecting 160,000. This was huge disappointment!
At the same time the Bureau stated that the U.S unemployment rate fell to 4.7% in May from 5.0% in April. Economists know this was largely a function of 458,000 workers dropping out of the labor force.
Are you perplexed yet? So was I, so I turned to the economists at J.P. Morgan for clarification. Their public response made it clear that these seemingly contradictory numbers are rather foreboding.
The latest employment numbers indicates to these economists a heightened probability of a recession happening within the next 12 months. The current economic recovery looks more vulnerable!
“Our preferred macroeconomic indicator of the probability that a recession begins within 12 months has moved up from 30% on May 5 to 34% last week to 36% today,” J.P. Morgan’s Jesse Edgerton wrote.
“This marks the second consecutive week that the tracker has reached a new high for the expansion.”
J.P. Morgan’s proprietary model factors in the levels of several economic indicators, including consumer sentiment, manufacturing sentiment, building permits, auto sales, and unemployment.
J.P. Morgan notes that non-farm payrolls are not a part of the model. Yet the unemployment rate is. Surprisingly, a low unemployment rate can be considered an ominous sign.
“The unemployment rate enters the model in two ways,” Edgerton explained. “As a near-term indicator, we watch for increases in the unemployment rate that occur near the beginning of recessions.
“So [the June 3] move down in the unemployment rate lowered the recession probability in our near-term model. But we also find the level of the unemployment rate to be one of the most useful indicators of medium-term recession risk. So the move down in unemployment raises the model’s view of the risk of economic overheating in the medium run and raises the ‘background risk’ of recession.”
What does all this portend for those in the property management industry? Here are my suggestions:
1. Now may be a good time to reconsider your plans for growth and consolidation. Are you prepared for the possibility of a sizable recession? Is your debt maintenance sustainable?
2. No one wants to be a “bad news bear,” but now is an auspicious time to make sure your clients are not over leveraged or stretched too thin. Tactfully inform of your concerns and ideas.
3. Tighten up your screening process for residents. FICO scores and credit ratings can help you anticipate their financial priorities and the likelihood they’ll continue to pay their rent on time.
4. Replace problem clients with flexible, reasonable ones. If a client is a complainer during good times, what will they be like during an economic downturn? Save yourself from the aggravation.
Remember, recessions begin when the economy looks robust and credit is cheap. It’s when the unexpected events and data (remember 2007-2008?) surprise us that we’ll realize we’re in a recession.